CARD T179
Required Minimum Distribution (RMD)
A minimum withdrawal required from certain retirement accounts under tax rules. Starting dates and exceptions depend on the account and owner.
How it works
RMDs require distributions from specified tax-favored retirement accounts. The applicable starting age depends on birth year: current rules generally use 73 for those born 1951–1959 and 75 for those born in 1960 or later. Traditional IRA owners cannot use a still-working delay; certain employer-plan participants can, subject to plan and ownership rules. The first deadline is generally April 1 of the following year, with later annual deadlines December 31. Original Roth IRA and designated Roth plan owners have no lifetime RMDs; inherited-account rules differ. [3] [6] [37]
A traditional IRA owner subject to an age-73 starting rule reaches that age in 2026. The first RMD generally is due by April 1, 2027, and the 2027 RMD by December 31, 2027.
Delaying the first RMD can place two required payments in the next calendar year.
CARD T180
Exclusion Ratio
A calculation identifying the tax-free portion of certain annuity payments: the part that returns the owner’s previously taxed investment rather than paying taxable earnings.
How it works
Under the General Rule for an eligible nonqualified annuity, divide the investment in the contract by the total expected payments to find the exclusion ratio. Apply that percentage to each payment to identify the tax-free return of investment; the rest is generally taxable income. Lifetime-payment calculations use prescribed factors to estimate the total expected return. The exclusion ends once the permitted investment has been recovered. Qualified plans may use a different method, and withdrawals before annuitization follow different rules. [3] [4]
Assume an eligible contract has $60,000 of investment and a calculated total expected return of $100,000. The exclusion ratio is 60%. Of a $500 payment, $300 is a tax-free return of investment and $200 is taxable, until the permitted investment has been recovered.
Do not apply an annuitized-payment ratio automatically to a pre-annuitization withdrawal.
CARD T181
Nonqualified Annuity Withdrawals
Before annuitization, withdrawals from a modern nonqualified deferred annuity generally take taxable earnings first, then tax-free basis. Annuitized payments use different rules. For example, with $8,000 of gain, a $3,000 withdrawal is generally all taxable.
How it works
Modern nonqualified deferred annuity withdrawals before annuitization generally distribute earnings first, then basis. Taxable earnings are ordinary income and may face a 10% additional federal tax before age 59½ unless an exception applies. Contract surrender charges are separate from federal tax. Full surrender and annuitized payments require their own calculations; older contracts and special transactions can have different rules. [3] [4]
With $20,000 of basis and $28,000 of value, an ordinary $3,000 withdrawal is generally entirely taxable because $8,000 of gain is available.
A penalty-free contractual withdrawal can still be taxable and subject to federal additional tax.
CARD T182
Section 1035 Exchange
A qualifying exchange defers recognition of gain. Permitted directions include life insurance to life insurance or an annuity, and an annuity to another annuity. An annuity cannot be exchanged for life insurance under this rule. Life insurance and annuities may also be exchanged for qualified long-term care insurance. Surrender charges may still apply.
How it works
Section 1035 can defer gain recognition in a qualifying direct exchange. Permitted directions include life insurance to life insurance or an annuity, and an annuity to another annuity; an annuity cannot be exchanged for life insurance under this rule. Certain exchanges into qualified long-term care insurance also qualify. Tax basis generally carries over with applicable adjustments, so gain is deferred rather than erased. Ownership, insured-person, cash-received, and other requirements matter; surrender charges and new contract restrictions can remain. [9]
An owner directly exchanges a qualifying annuity worth $50,000 with $40,000 basis for another annuity. With no other adjustments, the new basis remains $40,000 rather than resetting to $50,000.
A 1035 exchange is not the same as a retirement-plan rollover, and it does not guarantee a better contract.
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Practice questions
Select an answer, then check it to see why each option is right or wrong.
T179 · Required Minimum Distribution (RMD)
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T180 · Exclusion Ratio
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T181 · Nonqualified Annuity Withdrawals
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T182 · Section 1035 Exchange
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Sources & further reading
Original explanations and practice scenarios informed by the following regulatory, legal, and product resources. State examples are not presented as nationwide deadlines or requirements.